Cost-Cutting Delays Rio Tinto’s Move Underground At Diavik Until Q3

In December, Rio Tinto (RTP-N, RIO-L) said it would cut jobs and spending and sell non-core assets to manage its roughly US$39-billion debt load and the aftershocks are being felt everywhere — including at superb mining operations like the Diavik diamond mine, 220 km south of the Arctic Circle.

Diavik Diamond Mines, a Rio Tinto company and the operator of the Diavik mine, says Rio Tinto’s cost-cutting initiatives mean it will have to defer the start of underground production at Diavik from the first quarter to the third quarter of this year.

“We’ve changed the scope of work for the contractor that is building the underground mine and the result is a reduced amount of underground mine construction workers,” Doug Ashbury, a spokesman for Diavik Diamond Mines, said in an interview from Yellowknife. “It’s a significant reduction. . . (and) one aspect of our larger effort to reduce costs following Rio Tinto’s announcement.”

The company is currently building an underground mine to replace open-pit mining at Diavik by 2012. Despite the deferral, construction work remains largely unchanged as the underground mine is essential to Diavik’s future diamond production.

The underground mine is expected to cost something in the neighbourhood of US$787 million. By the end of September, Diavik had completed about half of the 20 tunnels required to support the underground operation.

Other cost-cutting measures are under way, too. Capital projects will only proceed if they are “essential to worker health and safety, protection of the environment, and those that ensure ongoing operations,” Diavik said in a statement last month.

In addition, a small diamonds project Diavik announced in the middle of last year is being put on hold. The $50-million capital project involved additions and modifications to the ore processing plant to recover very small diamonds.

Exploration activity will also be trimmed back to focus solely on the area closest to the mine site, about 310 km northeast of Yellowknife.

Ashbury said he couldn’t comment on market speculation that Rio Tinto might shed Diavik as part of its cost-cutting measures and efforts to slash its net debt by US$10 million by the end of this year.

In December, Robert Gannicott, chief executive of Harry Winston Diamond (HW-T, HWD-N), Rio Tinto’s joint-venture partner at Diavik, said on a conference call that should Rio Tinto divest some or all of its stake in the Canadian diamond mine, that Harry Winston would step in and try to increase its share.

Rio Tinto’s Diavik Diamond Mines owns 60% of Diavik, while Harry Winston owns 40%.

Gemstones have been produced at Diavik since January 2003 and by the end of 2008 the mine will have produced roughly 50 million carats of rough diamonds.

Annual diamond production grew from 3.8 million carats in 2003 to 7.6 million carats in 2004, 8.3 million carats in 2005, 9.8 million carats in 2006, and 11.9 million carats in 2007. In the first nine months of 2008, diamond production had reached 6.6 million carats. (Fourth-quarter results have yet to be released.)

It was a superb engineering feat to get at the kimberlite pipes under the icy waters of Lac de Gras. The three diamond-bearing pipes lie just off the shores of a 20-sq.-km island called East Island. To mine these underwater orebodies, Diavik had to build two dykes out from the island.

The first open pit that was built hosts the A154 South and A154 North kimberlite pipes. Produc- tion from the A154 open pit is expected to cease in the first half of 2009.

A second open pit holding the A418 pipe moved into production in the second quarter of 2008. A418 contributed over half of Diavik’s third-quarter mining production. Production from the A418 pit is expected to continue through 2011.

A fourth pipe, called A-21, about 3 km south of the other three pipes, is being evaluated but has been taken out of the mine plan for the time being.

The underground phase of the mine will include blast-hole stoping and underhand cut-and-fill mining methods. The mined-out areas will be backfilled with paste cement to provide a strong safe roof overhead, Ashbury explains.

“Based on the shapes of the pipes — they are the roots of ancient volcanoes which brought the diamonds to surface — we will be mining beneath the open pits and not beneath the lake,” he says.

Nevertheless, as the tunnels are built, water will enter through natural fissures in the rock. This water will be pumped to the surface where it will be stored and the silt removed, before being returned to the lake.

Rio Tinto estimates that Diavik will have a 16-to 22-year mine life.

As of Dec. 31, 2007, Diavik’s reserves were 21.9 million tonnes of ore at 3.5 carats per tonne.